Yes, excellent post.
I think the general idea is common sense once you get past wishful thinking. The search for certainty in long-term data is a fool's errand.
It is a no-win situation because it should be obvious to almost anyone that, e.g. 10-year averages are not long enough to mean much. Now I have mixed feelings about a chart by Jim Otar that I'm about to show. It clearly illustrates one thing--historical financial time series are episodic
, in which characteristics persist for periods of time on the rough order of a decade or so, to be fairly suddenly succeeded by a period with different characteristics.
The dangerous thing is that by drawing those straight lines and corners, Otar is highlighting the animal shapes we're supposed to see in the clouds. It's tempting to imagine that you can guess where the next corner is. It is also not clear whether this structure is just the spontaneous outcome of chaotic processes... or whether it is being exogenously driven by (chaotic) historic events.
Nevertheless, it is clear that an average over a century of data is not an average of 100 independent points, it is an average over no more than about eight different episodes, regimes, or "secular markets."
Meanwhile, I do not think it is really possible to believe that the stock market of the early 1900s... when it was the playground of a small number of wealthy individuals, before there was an SEC, when manipulation and inside information were taken for granted, and when bulls and bears did not mean people who were expecting the market to rise or fall but people who were trying to make
the market rise and fall... is quantitatively the same
as the stock market of 2018.
This shows up very obviously when we look at international data. On the one hand, if we take long-term data at face value, we have to conclude that international stocks have significantly
underperformed US stocks; total real return 1900-2015 6.4% U.S., 4.3% ex-US. On the other hand, if you look at what happened, it is obvious that most of the difference had to do with the devastating economic effects of World War II in many countries (versus the stimulating effect it had on the US). So unless we can make meaningful statements about the expected number and intensity of future wars, we have your non-stationarity.
Similarly, what can we make of this (long bond yields), what I call the two-and-a-half-humped camel? How many data points do we have here? Even if we assume that the next sixty years will consist of another thirty-year rise and thirty-year fall, what do we expect for its height? An average of two data points representing the height of the last two humps? Or is it better to say that the market just will not hold still for long enough for us to take a sharp picture of it?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.